Government Mandated Insurance Coverage vs. Private Industry Initiative to Market Insurance Coverage

us government building - insurance mandates


When I first read about the topic addressed in this article, my imagination took me to Don Quixote on his mighty war horse charging across the tulip fields of Holland waving his sword and lance, defending the damsels against the advancing windmills. Much ado about nothing.

As I went back and read the summaries of the bills, my thoughts turned to wondering what the governor, insurance commissioner, and legislators were putting in their pipes and smoking as they wrung their collective hands while wailing, what can we do to protect these poor defenseless Californians against the big bad forces of having to make consumer choices on their own volition? Where is the Jedi when you need him?

Then, upon even closer perusal, it appears the governor, by signing these bills into law, legitimized putting the fox in charge of the hen house. Whoa! Perhaps the above narrative is a little tongue in cheek but in reality, where’s the beef?

Proposed Government Regulations

What are these bills and what do they accomplish? Summarizing news articles found in Insurance Journal June 15, 2018, California Department of Insurance news release July 11, 2018, and article in Lake County News titled “Bill to Protect Wildfire Survivors Signed by Governor” dated August 29, 2018, this is the jist of those bills.

AB 1772 would extend the amount of time a home or business owner has to rebuild an insured property from two to three years after a declared wildfire emergency and receive the full replacement costs to which they are entitled; AB 1797 would require insurers to either provide a policyholder with a full replacement cost estimate every other year or apply an inflation factor to the dwelling limit at each renewal and clearly offer the consumer the option to obtain a full replacement cost estimate; AB 1799 would require insurers to provide one free, full set of certified policy documents, including any endorsements and the policy declarations page within 30 calendar days of a covered loss, upon the request of a policyholder; and AB 1800 would clarify the current law that an insurer must pay out the full extended replacement cost benefit covered under the provisions of a plan, regardless of whether the policyholder chooses to rebuild at the same location, rebuild at a new location, or purchase an existing home.

In all four of these bills only a couple of things of substance are found: 1) Extending the time to rebuild (AB 1772) is a legitimate request, particularly in an area where so much damage has occurred, as would be the case with wildfire. It may take the claims adjusters and building contractors a considerable amount of time just to get to the point where estimations can be generated. It is not as if there is an unfathomable number of builders available to actually accomplish the work; and even though insurance companies can bring in additional claims adjusters, they also have time constraints as well. In some major catastrophic events material availability becomes a very real issue. In those circumstances, workers can only do so much until they can be resupplied. Homeowner should not be penalized for circumstances beyond their control. 2) allowing the insured (AB 1800) to rebuild at a different location or purchase an existing home is another plus found in the legislation.

Areas which have been burned over, prone to future flood damage, wind damage, volcanic activity, mudslides, etc. should be taken into consideration when requiring replacement in existing areas of loss. No one wins if the replaced home will still be subject to future loss simply because of where it is located. It is rather intriguing to an outsider looking in to understand why an insurer would be reluctant to allow the insured to take up a domicile elsewhere. It doesn’t make sense to replicate a scenario where loss could occur again. This is particularly true of well known flood plains and areas of hurricane activity. It would seems be a good compromise for the insured and the insurer to allow some latitude in determining a different location if the amount of loss paid for isn’t going to be impacted by the new location.

Government Red Tape

The other portions of the bills are simply government regulations placing unnecessary regulations on the insurance industry. Mandating dissemination of information is going to have little or no effect on the actions of the buying public. Moreover, as a point of interest, when an insurance company underwrites an application for insurance, it already provides a complete policy with appropriate declaration page, endorsements, and appropriate riders upon issuance of the policy. Whenever there is any material change in coverages, those are noted with new declaration and endorsement pages.

Current regulations already require insurance companies to provide a complete and comprehensive estimate of the cost to replace a home when a replacement estimate is provided by the insurer. To somehow say that codifying this already existing regulation will change things is ludicrous. It appears these bills are more marshmallow than substance. How fluffy the comment made by the Insurance Commissioner Dave Jones when he announced that on August 28, 2018, Governor Jerry Brown had signed into law Assembly Bill 1797. After thanking the governor for signing ABC 1797 into law, he says, “It is critical that homeowners have enough information annually to make informed insurance coverage decisions to give them the peace of mind that insurance is meant to provide. I thank Assemblyman Levine for championing it in the Legislature to help homeowners avoid being underinsured in the future.” What? Is there something in the air or water which keeps homeowners from doing this already? If the legislation requires the potential insured to abide by and purchase according to mandated estimate (sound familiar to another insurance mandated program–Obama Care) then this only becomes another unwanted and unneeded government regulation. Our peace of mind should be the results of our own due diligence, not the actions of another party who has a vested interest.

Dilemma Created by Government Regulations

Here’s the fox in the hen house and/or catch 22 scenario: In the past, the insurer’s role was simply to insure for an agreed upon amount by the insured and the insurer, and then in the event of a loss indemnify for that amount. The consumer still had a hand in cost estimation. In an effort to assist the consumer in establishing values and to make sure proper insurance amounts were being used, the insurance company used a “building industry” tool like Marshall and Swift Building Cost Estimator. Both the insurer and the insured had the choice of how much a structure should be insured. Once an amount was agreed upon, the insurer agreed to underwrite the insurance for that amount and the insured paid the premium accordingly. Potential indemnification values were mutually agreed upon between a willing buyer (insured) and willing seller (insurer) in this arms length transaction.

If now by legislation the insurance industry is to establish building values, establish premiums, dictate insurable perils, and determine indemnification, and the buying public must purchase insurance based on those values, the consumer is at the mercy of the insurance industry sales department. Where is the check and balance in this system? There is none. But then you say, the insured does not have to follow the recommendation of the mandated full cost replacement of the insurance company. The question is justified then–why was the expense the insurance company burdened with if the requirement can go unheeded? Thus, the fox guarding the hen house and/or catch 22 scenario. No party is there to negotiate between the interested parties.
Like so many things taken on by politicians, solutions become accomplice to the problem. Repeal these laws and let the private insurance industry and the buying public work out a solution if there is a problem to begin with. Public demand can quickly turn the heads of those striving to meet those demands. Competition always lifts all boats, or weeds out those who won’t provide what the public wants.

So congratulations to the governor and legislators for this King’s New Clothes legislation–or condolence to citizens and insurance industry saddled by yet another bureaucratic feel-good scheme.

(Glen B. Marks, CLU, is a retired insurance agent of 42 years. Worked in City Government in Arizona prior to insurance career. Earned a Master’s degree in Public Administration from Brigham Young University and Chartered Life Underwriter degree from American College. Opinions expressed are his own.)

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